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RBI springs 50 bps rate cut surprise

The Reserve Bank of India (RBI) on Tuesday lowered its benchmark interest rate by a higher-than-expected 50 basis points to a four-year low, seeking to ease borrowing costs and stimulate economic growth by taking advantage of record-low consumer price inflation.

Governor Raghuram Rajan reduced the repo rate, at which the central bank lends to commercial banks, to 6.75% from 7.25% in the fourth cut since the start of January. The repo rate has been cut by a total of 125 basis points this year.

One basis point is one-hundredth of a percentage point. Ten bank economists and executives polled by Mint had expected a cut of no more than 25 basis points.

The higher-than-expected rate cut should silence critics who believe RBI’s insistence on inflation control above all else has come at the cost of economic growth, which slowed to 7% in the three months ended June from 7.5% in the preceding quarter.

State Bank of India, the country’s largest lender, responded swiftly with a 40 basis point cut in its base rate, the rupee strengthened, bond prices rose and stock indices jumped after the rate cut.

HT Mint, New Delhi, 30th Sept. 2015